HIGH COURT OF JUDICATURE FOR RAJASTHAN BENCH AT JAIPUR D.B. Income Tax Appeal No. 662 / 2009 Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/s. Rajdhani Crafts, Plot No. 54-55, Shiv Vihar Colony, Opp. Power House, Road No.5, VKI Area Jaipur ----Respondent Connected With D.B. Income Tax Appeal No. 186 / 2011 Commissioner of Income Tax, Jaipur-II, Jaipur ----Appellant Versus M/s Rajdhani Crafts, Plot No. 54-55, Shiv Vihar Colony, Opp. Power House, Road No.5, VKI Area, Jaipur ----Respondent D.B. Income Tax Appeal No. 403 / 2011 Commissioner of Income Tax, Jaipur-II, Jaipur. ----Appellant Versus M/s. Rajdhani Crafts, Plot No. 54-55, Shiv Vihar Colony, Opp. Power House, Road No.5, VKI Area Jaipur ----Respondent D.B. Income Tax Appeal No. 142 / 2015 Principal Commissioner of Income Tax, Jaipur-2, Jaipur ----Appellant Versus M/s Sanklp International, F-944, Road No.14, VKI Area, Jaipur ----Respondent For Appellant(s) : Mr. R.B. Mathur with Mr. K.D. Mathur, Mr. Prateek Kedawat (2 of 11) [ ITA-662/2009] For Respondent(s) : Mr. Ajay Gupta HON'BLE MR. JUSTICE K.S.JHAVERI HON'BLE MR. JUSTICE INDERJEET SINGH Judgment 02/08/2017 1. In all these appeals common question of law and facts are involved hence they are decided by this common judgment. 2. By way of these appeals, appellant have assailed judgment and order of Tribunal whereby tribunal has dismissed appeal of department and allowed appeal of assessee in appeal no.662/2009, in appeal no.186/2011 appeal of department was dismissed, in appeal no.403/2011, appeal of department was dismissed and assessee was allowed and in appeal no.142/2015, appeal of department was dismissed. 3. This court while admitting appeals framed following substantial questions of law:- 3.1 Appeal No.662/2009 admitted on 26.2.2010 Whether assessee can claim benefit of Section 10BA of IT Act when it is not fulfilling required conditions of aforesaid provisions, more specially to show that it is manufacturing eligible articles as provided u/s 10 BA explanation (b). 3.2 Appeal No.186/2011 admitted on 29.8.2012 Whether in facts and in circumstances of case, ITAT was justified in law in allowing exemption u/s 10B of Act to assessee despite of facts that (3 of 11) [ ITA-662/2009] condition laid down for same are not satified and fulfilled by assessee. 3.3 Appeal No.403/2011 admitted on 21.12.2011 Whether in facts and in circumstances of case, ITAT was justified in law in holding that assessee was eligible for exemption u/s 10BA of IT Act despite of fact that assessee was not fulfilling required conditions. 3.4 Appeal No.142/2015 admitted on 26.9.2016 Whether in facts and circumstances of case ITAT was justified in law in directing to allow deduction u/s 10BA despite of fact that assessee was not fulfilling conditions laid down in Act for claiming said deduction. 4. Counsel for appellant Mr. Mathur has taken us to order of Tribunal which reads as under:- 6 We have heard rival contentions and perused facts of case. assessee firm was constituted on 22-8-2000. There is nothing on record whether first year of commencement of business was assessment year 2000-01 or not. From perusal of record and various submissions, it appears that first assessment in case of assessee is for assessment year 2001-02. ld Counsel for assessee Shri HM Singhvi has pointed out assessment made u/s 143(3). From assessment year 2001-02 and 2003-04 where it has been accepted by Department in assessment orders that assessee is engaged in manufacturing and export of wooden handicraft items. Though assessee was entitled to deduction us 80IB for assessment year 2000-01 to assessment year 2003-04 yet it was not claimed since assessee had claimed deduction u/s 80HHC upto assessment year 2003-04 and has claimed deduction u/s 10BA in view of newly inserted Provisions of Finance Act, 2003 we.f. assessment year 2004- 05. As per Section 10BA of Act, 5 conditions have to be satisfied first condition is that assessee manufactures or produces eligible articles or things without use of imported raw material. This is not issue before any of (4 of 11) [ ITA-662/2009] authorities below and before us, As regards second condition, undertaking of assessee is not formed by splitting up or reconstruction, of business already in existence and third condition is that it is not formed by transfer to new business of machinery or plant previously used for any purpose. condition no. 4 is that ninety per cent or more of its sales during previous year relevant to assessment year are by way of exports of eligible articles or things. AO in his order observed that assessee is using various types of electrical run machines for manufacture of various furniture items and even single handmade item has been used. items found are utility items. In this respect, it has been submitted by ld AR Shri HM Singhvi, hereinbefore that assessee purchased goods as logs, beams, cans, off cut and then seasoning of wooden is got done which is cut in different sizes as per export order. Thereafter, grinding, turning and clamping is done with help of tools which has been named by AO as machines for purpose of manufacturing of items manufactured by assessee. It is only ground work which has to be done manufactured with help of tools/small machines though electrically operated and there is no prohibition by statute provided u/s 10BA of Act. It was also submitted and available on record that main work like punching, special branded nails made of brass/iron having artistic and antique look, caring, moulding, designing ornamental work, fitting of brass and iron items and making of Jallis of different sizes and designs, polishing is done by hand by skilled labourers and artists. Thereafter, coating is done by chemical by spray machine. All these items made of wood are pieces of art and decoration and having artistic value and cannot be said to be utility items. item is used by customer but having artistic value according to likes of buyer. artistic and carving work of different type and polishing done by artist is to make product decorative and beautiful. assessee has been recognized by Department of Handicraft Export Council of India, Central Excise Department, Industries Department, Sales Tax Department as manufacturer of wooden handicraft items and wooden handmade items having artistic value (5 of 11) [ ITA-662/2009] and exports are made to diverse buyers like Europe, USA, Japan, Australia etc. goods are exported after appraisal and clearance by custom authorities. Photostat copies of export invoices are on record mentioning items as artistic India wooden handicraft. Such items as argued may not appear to be artistic to AO but they are artistic to foreign buryers being decorative. Nothing has been brought on record that such items are not of artistic value which is basic condition in Section 10BA of Act. In such circumstances and facts of case, we are of view that items produced are eligible for deduction u/s 10BA of Act. undertaking of assessee is not formed by splitting up or reconstruction of business already in existence and also not formed by transfer of business, machine or plant previously used for any purposes. Since assessee firm constituted on 28-2-2000 and as per record has commenced production from assessment year 2001-02 of same items i.e. wooden handicraft items. This is evident from assessment order for assessment year 2001-02 and 2003-04 u/s 143(3) (PB 96 to 112). Section 10BA of Act does not provide that only new firm after introduction of Section can avail exemption i.e, no cut off period for formation of undertaking is specified u/s 10BA of Act whereas Section 10A, 10B, 80, 80IA, 80IB, 80IC provided for certain specific period i.e. day on which manufacturing is started and deduction is made available oncertain percentage of profits as provided in such sections. Moreover, Shri H.M. Singhvi, CA has also invited our attention to CBDT circular No. 01/2005 regarding tax holiday u/s 10B of Act to 100% EOU which clarifies that undertaking set up in Domestic Tariff Area and deriving profit from export of articles or things or computer software manufactured or produced by it which is subsequently converted into EOU shall be eligible for deduction u/s 10BA of Act on getting approval as 100% EOU. However, deduction shall be available for remaining period of ten consecutive assessment years from year in which it has got approval as 100% EOU. On same analogy, deduction u/s 10B is allowable, it has been argued by ld. AR Shri HM Singhvi, CA. It was also argued that employees/workers were employed prior to Section l0BA does not mean that unit has been (6 of 11) [ ITA-662/2009] formed by reconstruction of earlier business. We are convinced with arguments made by ld. AR that present unit is not formed by splitting up or reconstruction by transfer of machinery or plant previously used for any purposes. AO has also objected to wages expenditure claimed by assessee is not verifiable. assessee submitted that a fire occurred in factory premises of assessee on 16-4-2005 which is also mentioned at page 12 of AO's order and therefore, such record of wages could not be produced. assessee submitted comparative figures of wages and books of account are audited and trading and profit and loss account of preceding years and order in dispute was on record and both years accounts are audited under statute. Therefore, in view of decision of Hon'ble Delhi High Court in case of ACIT Vs Jay Engg Works, 113, ITR 389, supra where it has been held that where original books of account have been destroyed in fire, Tribunal could rely upon other materials consisting of auditor's report from which it could be inferred that deductions were properly supported by relevant entries in books of account. ld. AR has also relied upon decision on allowability of section 10B of Act and ITAT Jaipur bench decision in case of DCIT vs. Manglam Arts (ITA No. 815/JP/07 dated 20-6- 2008) and Goverdhan Prasad Singhal vs. I.T.O. (ITA No. 200/JP/08 dated 24-10-2008). In such circumstances and facts of case and our findings mentoned hereinbefore and decision of various courts of law relied upon by ld. AR of assessee, we are of view that assessee is eligible for deduction us 10BA of Act. Therefore, assessee in present facts of case satisfies conditions No. 2, 3 and 4 as provided in Section 10BA of Act. As regards condition no. 5 for employment or more workers, there is no dispute before us. Therefore, in such circumstances and facts of the assessee is eligible for deduction u/s 10BA of Act. As per Section 10BA(6) of Act where deduction is allowed under this Section, no deduction is allowed under any other section i.e. 80HHC in respect of its export profit as directed by ld. CIT (A). Thus Ground No. 1 of assessee is allowed and Ground No. 1 of Revenue is dismissed. (7 of 11) [ ITA-662/2009] Ground No. 2 of assessee: ld. CIT (A) has erred in confirming action of AO in disallowance to extent of Rs 40,000/- made by AO on adhoc basis out of manufacturing expenses, office expenses, administrative expenses and selling and forwarding expenses. Ground No. 2 of Revenue: ld. CIT (A) has erred in allowing relief of Rs. 48,40,968/- on account of various expenses. 4.1 He contended that tribunal has wrongly followed decision in DCIT vs. Manglam Arts (ITA No.815/JP/07 dt. 20.6.2008) and Goverdhan Prasad Singhal vs. ITO (ITA No.200/JP/08 dt. 24.10.2008) though condition no.2,3 & 4 are not fulfilled. 4.2 Mr. Mathur has taken us to evidence and contended that condition as required under Section 10BA is that unit is not formed by splitting up or reconstruction of business already in existence and since said condition is not fulfilled, therefore assessee is not entitled for exemption u/s 10BA. 4.3 Taking into account judgment which sought to be relied by tribunal in Manglam Arts and other judgment have been confirmed by this court in tax appeal no.25/2009 decided on 14.2.2017 wherein after considering evidence on record, this court held as under:- 6. Mr. Jhanwar, counsel for respondent has taken us to judgment of Tribunal and contended that while considering process which has been undertaken by assessee, Tribunal has observed as under: (8 of 11) [ ITA-662/2009] various activities carried out by appellant, are as under:- (i) Firstly, appellant purchases wood, semi finished material which requires further wood and other work of beautification and of artistic value. There apart, other raw material, wooden out of which is main, and others i.e. grass, nails etc. are purchased. (ii) Thereafter various other items are added depending upon designs, size, quality of subjected item to be exported, (iii) After purchasing semi finished goods and raw material, as stated above, very first step is to assemble same, if so required. Some time semi finished furniture is required to be given further shape as per desired exportable designs. (iv) Thereafter, punching is done by hammering nails by hand. It is pure labour work which can be done by experts only. It may be noted that nails are of special type having artistic and antique look. (v) Fitting of brass and iron items again with view to give artistic and antique look. (vi) Filling and filing with view to smoothen surface. (vii) Sanding (viii) Carving with view to bring artistic value and to show that these are antique items. (ix) And lastly polishing (x) Thereafter, various wooden items are fitted according to need and design of exportable wooden article, i.e. wooden moulding is fitted Inlay is done. 7. He contended that taking into consideration observations made by Supreme Court in case of Income Tax Officer, Udaipur Vs. Arihant Tiles and Marbles (P) Ltd.- (2010) 320 ITR 79 (SC), Supreme Court has observed as under: 16. In case of Aman Marble Industries Pvt. Ltd. v. Collector of Central Excise reported in MANU/SC/0858/2003 : 157 ELT 393(SC), question that arose for consideration was whether (9 of 11) [ ITA-662/2009] cutting of marble blocks into marble slabs amounted to manufacture for purposes of Central Excise Act. At outset, we may point out that in present case, we are not only concerned with word "manufacture", but we are also concerned with connotation of word "production" in Section 80IA of Income Tax Act, 1961, which, as stated herein-above, has wider meaning as compared to word "manufacture". Further, when one refers to word "production", it means manufacture plus something in addition thereto. word "production" was not under consideration before this Court in case of Aman Marble Industries Pvt. Ltd. (supra). Be that as it may, in that case, it was held that "cutting" of marble blocks into slabs per se did not amount to "manufacture". This conclusion was based on observations made by this Court in case of Rajasthan State Electricity Board (supra). In our view, judgment of this Court in Aman Marble Industries Pvt. Ltd. (supra) also has no application to facts of present case. One of most important reasons for saying so is that in all such cases, particularly under Excise law, Court has to go by facts of each case. In each case one has to examine nature of activity undertaken by assessee. Mere extraction of stones may not constitute manufacture. Similarly, after extraction, if marble blocks are cut into slabs per se will not amount to activity of manufacture. 17. In present case, we have extracted in detail process undertaken by each of respondents before us. In present case, we are not concerned only with cutting of marble blocks into slabs. In present case we are also concerned with activity of polishing and ultimate conversion of blocks into polished slabs and tiles. What we find from process indicated herein-above is that there are various stages through which blocks have to go through before they become polished slabs and tiles. In circumstances, we are of view that on facts of cases in hand, there is certainly activity which will come in category of "manufacture" or "production" under Section 80IA of Income Tax Act. As stated herein- above, judgment of this Court in Aman Marble Industries Pvt. Ltd. was not required to construe word "production" in addition to word (10 of 11) [ ITA-662/2009] "manufacture". One has to examine scheme of Act also while deciding question as to whether activity constitutes manufacture or production. Therefore, looking to nature of activity stepwise, we are of view that subject activity certainly constitutes "manufacture or production" in terms of Section 80IA. In this connection, our view is also fortified by following judgments of this Court which have been fairly pointed out to us by learned Counsel appearing for Department. 18. In case of Commissioner of Income Tax v. Sesa Goa Ltd. reported in MANU/SC/1123/2004 : 271 ITR 331 (SC), meaning of word "production" came up for consideration. question which came before this Court was whether ITAT was justified in holding that assessee was entitled to deduction under Section 32A of Income Tax Act, 1961, in respect of machinery used in mining activity ignoring fact that assessee was engaged in extraction and processing of iron ore, not amounting to manufacture or production of any article or thing. High Court in that case, while dismissing appeal preferred by Revenue, held that extraction and processing of iron ore did not amount to "manufacture". However, it came to conclusion that extraction of iron ore and various processes would involve "production" within meaning of Section 32A(2)(b)(iii) of Income Tax Act, 1961 and consequently, assessee was entitled to benefit of investment allowance under Section 32A of Income Tax Act. In that matter, it was argued on behalf of Revenue that extraction and processing of iron ore did not produce any new product whereas it was argued on behalf of assessee that it did produce distinct new product. view expressed by High Court that activity in question constituted "production" has been affirmed by this Court in Sesa Goa's case saying that High Court's opinion was unimpeachable. It was held by this Court that word "production" is wider in ambit and it has wider connotation than word "manufacture". It was held that while every manufacture can constitute production, every production did not amount to manufacture. 8. He has contended that word production is to be construed as wider meaning than manufacture and in view of observations (11 of 11) [ ITA-662/2009] made by Supreme Court, view taken by Tribunal is just and proper. 9. Mr. Mathur has also contended that regarding second issue with regard to ESI and PF, however, same is covered by decision of this Court in case of Commissioner of Income Tax Vs. M/s State Bank of Bikaner & Jaipur- D.B. Income Tax Appeal No.177/2011 decided on 06.01.2014 wherein it has been held as under: Thus, we are of view that where PF and/or EPF, CPF, GPF etc., if paid after due date under respective Act but before filing of return of income under Section 139(1), cannot be disallowed under Section 43B or under Section 36(1)(va) of IT Act. 12. In view of observations made by Supreme court in case of Income Tax Officer, Udaipur Vs. Arihant Tiles and Marbles (P) Ltd. (supra), we are of opinion that process which has been prescribed by Tribunal in para 10 clearly covers process and will cover under section 10BA. Therefore, in our view, view taken by Tribunal is just and proper and no interference in judgment of Tribunal is called for. issue is answered in favour of assessee and against department. 5. In that view of matter, issue is answered in favour of assesee and against department. appeals stand dismissed. copy of this judgment be placed in each file. (INDERJEET SINGH)J. (K.S.JHAVERI)J. Brijesh 141-144. Commissioner of Income-tax, Jaipur-II, Jaipur v. Rajdhani Craft